JP Morgan (JPM) has released its 2016 currency forecasts and
among the majors, the bank’s analysts pick the Japanese yen (JPY) as the
star-turn for next year, with fundamentals and politics providing supportive
pillars for the Japanese currency.
The bank expects JPY to appreciate against most of G-10
currencies including USD and the pace of JPY appreciation in trade-weighted
terms will accelerate and target USD/JPY at 115 for 1Q16, 117 for 2Q16, 113 for
3Q16 and 110 for 4Q16.
Among the fundamental supports for the Japanese currency,
the bank highlights an improving current account balance, the yield
differential between the EUR and JPY which sees the common currency as a
cheaper funding option, a less dovish Bank of Japan and the ‘undervaluation’ of
the JPY against the USD.
In political terms, the
Japanese government is seem being cautious on further currency weakness
after USD/JPY hit 125 this year. JPM says that with food prices starting to
rise, while wages fail to grow adequately, “higher inflation induced by yen
weakness is clearly negative for consumption. In addition, it is also
undesirable for the yen to weaken further unnecessarily at this point in time
in order to have US Congress smoothly approve the recently agreed TPP.”
Among the other majors,
the policy divergence between the USD and the EUR is mostly in the price,
according to the bank, with EUR/USD drifting down to 1.03 in June 2016 before
ending the year at 1.13, while GBP is set to drift down to 1.45 mid-2016 before
ending the year at 1.57.
The AUD is seen at 0.72
in a year’s time, the NZD at 0.61 and the Canadian dollar at 1.34.
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